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Saturday, December 08, 2007

Hungary Q3 2007 GDP Revisited

According to the Hungarian Statistics Office (KSH) gross domestic product grew by 0.3% quarter on quarter in the July-September period of 2007, based on seasonally adjusted first estimate figures released last Friday. The KSH also took the opportunity to reduce the Q2 growth figure to zero from the previous 0.1% estimate.

Economic growth in Q3 was 0.9% yr/yr according to unadjusted data and 1.0% according to figures adjusted seasonally and for calendar impacts (vs. a prelim ary estimate of 1.1%). The comparative figure for the previous quarter was 1.2% yr/yr (both adjusted and unadjusted).

The engine of growth continued to be industrial output which registered a 7.4% yr/yr growth, and this output contributed of course contributed considerably to the 14.6% export growth which was registered.

The main drag on growth was, unsurprisingly, final household consumption, which declined by 2.0% yr/yr. Previously, the slowest pace of growth in recent memory was back in 1996 when the fiscal adjustment package of Economy Minister Lajos Bokros pushed growth to below 1% y-o-y.

If we now come to look at the evolution of GDP shares for some of the components, we will see, for example, that both agriculture and construction have been more or less stable in recent years (ie we have not had any sort of dramatic construction lead boom in recent years. On the other hand, if we look at manufacturing and real estante and financial services, we will see that the latter have clearly grown in importance in relation to the former, which is in many ways a pretty normal development.

On a quarterly basis, the largest growth was observed in industry (3.1%), followed by services (1.3%) and transport, storage and communications (0.9%). Consumption expenditure of households fell by 0.8% yr/yr and 0.2% q/q, while public consumption fell by 3.8% yr/yr and 3.2% on a quarterly basis.

Exports rose by 4% q/q (vs. 2.0% in Q2) and imports increased by 5.9% from the previous quarter, against a q/q decline of 0.3% in Q2. What this means is that while Hungary has now managed to achieve a small goods trade surplus:

the rise in imports pegs pretty closely on the the coat tails of the rise in exports, something for which the very strong value of the forint must undoubtedly bear some responsibility, since as the euro rises, and the forint clings on to par with the euro, the general tendency of opening the doors to products from China and other low-cost manufacturers (as well of course Japan, and a now much cheaper and more competitive United States) must have a reflection of the Hungarian import situation.

So it is really rather cold comfort that the 0.3% q/q growth is the largest this year, firstly because, as Portfolio Hungary indicate, it is disappointingly small and secondly, because it would really be very premature to start speaking of any kind of upswing even in the short term.

It is important to bear in mind that the Hungarian government - according to its own latest Dec 1st estimates - is still running a fiscal deficit this year of 6.2% of GDP. The government are committed to reducing the deficit further next year, so this has naturally to be subtracted from GDP: we are going to face more fiscal tightening. What is incredible is that Hungary is currently only able to get 1% y-o-y GDP growth at the present time despite this whopping fiscal stimulus. One day we will need to get into a close examination of how it was we got here in the first place, and why Hungary is so apparently different from the rest of the EU10.

Also monetary policy is going to remain restrictive. The current rate of 7.5% is the highest in the European Union, and there is little room for any substantial reduction given the rate of domestic inflation - the government has just agreed to raise public sector wages by an average 5% in 2008, so it is hard to see inflation being anywhere near the "comfort zone" yet awhile. Of course, systematic tightening on all fronts will eventually produce nominal as well as real wage deflation, especially if we sink into a deepish recession, which seems to look all but unavoidable when we come to think about the third factor - external conditions - which are almost certainly going to deteriorate over the next 6 to 9 months, as the powerhouse economies of the eurozone - Italy, Spain and Germany (France is the only semi-brightish star on the horizon) are all slowing mightily even as I write.

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About

Edward 'the bonobo' is a Catalan economist of British extraction based in Barcelona. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".

Apart from his participation in A Fistful of Euros, Edward also writes regularly for the demography blog Demography Matters. He also contributes to the Indian Economy blog . His personal weblog is Bonobo Land . Edward's website can be found at EdwardHugh.net.